Business A

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Revenue-sharing and Cost-sharing Contracts
Question 1
A revenue-sharing contract is an agreement involving a retailer and a manufacturer where a retailer purchases every unit of a product at a wholesale price from a manufacturer and pays an additional percentage of revenue that the retailer generates to the manufacturer. These type of contracts are common in the video cassette rental industry. There are various advantages and disadvantages of revenue sharing for the manufacturer and retailer.
The benefit of the revenue-sharing contract to the retailer is that he/she can get products at a reduced price. This situation helps to reduce the risk since the retailer shares it with the manufacturer. There is an opportunity for the retailer to earn more profit from the contract. The disadvantage of the agreement is that the retailer finds it difficult to work effectively with other suppliers that are not involved in a revenue-sharing contract. The contract cannot work well unless the retailer provides accurate information regarding revenues. The retailer has to bear the burden of high administration cost since there is a need for an excellent information system on revenues for trust to be established. The revenue of a retailer depends on the actions of all other competitors in the market. A revenue-sharing contract does not consider the retailer’s effort including advertising, service quality and store presentation (Yao et al.

642).
The manufacturer can get a certain percentage of the revenue that the retailer makes which helps in compensating for the risk of offering products at a cheaper rate. The disadvantage is that the manufacturer needs to proof the revenues of the retailer which tends to reduce the profit. The manufacturer has to bear with the risk since there is a probability of earning less from the contract if the retailer does not sell as expected (Yao et al. 639).
Question 2
The retailer benefits from cost sharing since the products are sold to them at a reduced cost. The retailer can access a large volume of goods that they need to make sales since production is high. The disadvantage of this contract is that it is the retailer has to bear part of the production cost which is a risk. A retailer may be unable to sell all the products received from the manufacturer due to market issues (Ghosh 326).
The advantage for the manufacturer is that cost-sharing allows for the increased production of products which a company can sell and get high profits. The cost of production is low. The disadvantage of this contract is that the manufacturer compensates the retailer by offering products at a reduced price.
Works Cited
Ghosh, Debabrata, and Janat Shah. “Supply chain analysis under green sensitive consumer demand and cost sharing contract.” International Journal of Production Economics 164 (2015): 319-329.
Yao, Zhong, Stephen CH Leung, and Kin Keung Lai. “Manufacturer’s revenue-sharing contract and retail competition.” European Journal of Operational Research186.2 (2008): 637-651.